Book Symposium Investment Law: Comments on Alschner and Tuerk

[Andrea K. Bjorklund is the L. Yves Fortier Chair in International Arbitration and International Commercial Law at McGill University Faculty of Law, Canada]

Mr. Alschner and Ms. Tuerk’s contribution very usefully highlights three areas where international investment law and sustainable development principles may intersect: climate change, industrial policy, and corporate social responsibility.  This precision is particularly valuable given the less-than-concrete nature of the idea of “sustainable development”. 

Two common threads running through each section are the essential participation of the host state in fostering sustainable development and the tension between the pursuit of short-term goals (such as rapid economic development and the influx of capital and immediate returns in investment) and long-term goals (such as fostering sustainable economic development).  Investment agreements, either individually or in the guise of a multilateral instrument establishing shared principles, can contribute only a limited amount to the furtherance of sustainable development goals unless their reach expands drastically.  That point is well illustrated in the area of climate change.  Investment agreements themselves do not require that states legislate in environmentally friendly ways, or that states prioritize fighting climate change over promoting robust short-term industrial growth.  Thus, amendments to existing investment agreements, or carefully drafted new agreements, can satisfy one side of the equation – they can eliminate whatever constraints investment agreements might impose on states’ desire regulate to combat climate change or to promote certain industrial policy goals.  Yet states must still want to enact those laws.

States also must be the primary architects of their industrial policy, and certainly should strive to ensure that their investment agreements do not interfere with their pursuit of those goals. Yet, as Mr. Alschner and Ms. Tuerk note, many policies designed to foster municipal economic development can also lead to unjustified investment protectionism.  For example, the “infant industries” argument often offered by states (and by industries) seeking to facilitate the establishment of a national entrant into a competitive industry.  In the short term such policies are possibly beneficial.  In the long run, however, a state might be left with elderly infants who do not want to leave the shelter provided by policies, often somewhat costly, that insulate them from competition, particularly in the home market.

Insofar as fostering responsible investor behavior is concerned, again the host state’s laws are, at least in principle, the best vehicles for regulating and monitoring the activities of investors.  Host states can impose conditions on investors prior to granting concessions, ensure compliance with local laws prior to granting licenses, and generally police investors’ behavior.  Some states might lack the capacity effectively to ensure that investors follow those laws, but their strong commitment to requiring responsible corporate behavior is the ideal situation and without host states’ engagement and cooperation fostering that behavior will be very difficult.

The authors recognize potential impediments to active host-state regulation, and suggest a few alternatives.  One is to amend international investment agreements to include references to corporate social responsibility and to encourage their interpretation in a manner that gives effect to those principles; another is encourage states themselves to engage in their best endeavors to promote companies’ adoption of corporate social responsibility principles.  A third is to ensure that incoming investors, prior to their admission, be subject to a screening procedure identifying their corporate social responsibility practices.  The fourth, and most ambitious, would be to include corporate-social-responsibility obligations in international investment agreements themselves – in other words, ensuring that investors have rights as well as responsibilities.

Given my suggestion that host states are in the best position to impose and enforce obligations on corporations doing business in them, I query whether the recommended alternatives are adequate to compensate for deficiencies in regulation by host states.  One concern is that by internationalizing the obligations domestic corporations would evade the same types of scrutiny.  Foreign multinational enterprises might be the biggest threats to responsible corporate social responsibility, but they are not the only violators.  Municipal laws requiring that all corporations doing business within the purview of the state abide by concrete rules would go furthest to ensuring the broadest coverage or norms, and ideally the most proximate investigation of their violations.

The most ambitious suggestion – ensuring that investors have rights as well as responsibilities in investment agreements – shows a great deal of promise in terms of rebalancing investment agreements, yet successfully implementing that change is not without difficulty and might raise some problems even as it solves others.  Indeed, Mr. Alschner and Ms. Tuerk recognize that whether including those obligations in “actually negotiated treaties is politically and legally feasible or even desirable remains open to debate”.  I think they are right to be cautious.

Imposing rights on investors in investment agreements will almost certainly lead to the filing of counterclaims.  In the first instance, this would likely aggrandize the power of investor-state tribunals who would be hearing more aspects of complex, multilayered disputes. For those concerned about the mechanism of investor-state dispute settlement itself, entrusting tribunals with the authority to hear counterclaims would possibly cement their status as alternatives to domestic courts. To the extent they would apply domestic public law, the arbitrators might be grappling with an unfamiliar law in which they can claim no special expertise.  Those tribunals would be yet one more step removed from the governmental process that enacted those laws and that might be able to act to correct any misapplication of the law.  Similar criticism can be levied at the potential for claims of corporate abuse to be heard in either a corporation’s “home” courts or in a jurisdiction that welcomes such claims (in the wake of Kiobel it seems that the United States might no longer qualify as such a jurisdiction, although if the dispute “touches and concerns” the United States its courts might still be open).  In practice they would siphon off from domestic courts disputes that might otherwise have been resolved locally. Domestic courts would then lose both the opportunity to exhibit their effectiveness and their ability to enhance their capacity to hear complex disputes.

These costs may be worth paying if they lead to greater corporate social responsibility and contribute to transparency in corporate activities.  But in the first instance local authorities would seem better placed to ensure vigorous and active monitoring of corporate compliance with local laws and regulations that are tailored to the country in which the corporation is doing business. Investment agreements should not be read to constrain those initiatives, and amending them to ensure that they are not might well be a good idea.  To the extent that investment agreements can be structured actually to encourage or even to require such initiatives, so much the better.  But one cannot expect too much of international investment agreements – they are unlikely to compel action in areas that states are disinclined to act.